The Benefits of Dynamic Pricing of Default Electricity

Service

Bernie Neenan

UtiliPoint International

Prepared for Assessing the Potential for Demand Response Programs

Institute for Regulatory Policy Studies

May 12, 2006

2

Source: The Benefits of Demand Response in Electricity Markets and Recommendations for Achieving Them. Feb. 2006,. USDOE

< 15 min

Energyefficiency

Price-Based Demand Response

DA-RTP RTPTOU

Years

System planning

Months

Operational

planning

Day-ahead

Scheduling

In-day

Dispatch

< 15 min

Systemmanagement

action

Time scale

RT balanced and regulated

system

Induced Demand Response

ICAPKWH Biddin

g

Emer DR

DLCI/C Load

Integrating DR into Electricity Markets

3

Dynamic Pricing – It’s About Time

6:00 am

1:00 am

10:00 pm

12:00 pm

8:00 am

12:00

6:00 pm

2:00 pm

x.xIndicates the relative price/kWh

Higher

price ratio

1.2

TOU 3(6 hr)

1.75

Cover

swing

hours

}}}

TOU 2S(6 hr)

2.0+Maximize price

ratio }

TOU 2(16 hr)

1.0

1.50

}

}

4

Dynamic Pricing – It’s About Time (2)

TOU 2S(6)

2.0+

VPP(6)

1.1 to10

Tie daily peak

prices to

market prices

1.01.0

RTP

Tie all hourly prices

to market prices

CPP(6)

1.50or5.0

One peak

price for normal days, and

another for

extreme days

5

Benefits of Dynamic Pricing

Participant Savings Savings to customers that take default service consist

of two components: Avoid paying the hedged service risk premium Savings from demand response behaviors

Savings from shifting away from high prices Consumer surplus from expanded load at low prices

Benefits to all Electricity Consumers Lower LMPS reduce bilateral market prices:

Lower competitive prices Lower default service prices

6

Benefits of Dynamic Pricing (2) Peak Load Reduction – Two Measures

Maximum single hour of demand response (MW) on annual basis

Average level of demand response (MW) coincident with June, July, August and September monthly zonal maximum demands

Market Performance benefits Resource Savings - Improvement in the efficient allocation of

societal resources

7

Benefits of Dynamic Pricing (3) Other Benefits

Improved reliability Market power mitigation Reduced emissions More choices Portfolio risk reduction Vertical market development (enabling

technologies)

These are hard to quantify, redundant or both

8

Benefits of Dynamic Pricing of Default Service in New England Service Benefits of alternative default service pricing Targeted to New England customers over 500 kW Customers distinguished by:

Business activity Load size and profile Price response (from NGrid Study)

Scenarios characterize market supply as: Status Quo (2004-5) High (more high prices more often) Extreme (even more higher prices more frequent)

9

Alternative Designs Evaluated

VPP(6)

1.1 to10

1.01.0

RTPCPP(6)

1.50or5.0

TOU 2(16 hr)

1.0

1.50

1.2

TOU 3(6 hr)

1.75

Current

DefaultBlock & Swing

Dynamic Default Service Alternatives

10

Block and Swing

Hedged Block Actual Usage

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 2223 24

0

500

1,000

1,500

2,000

2,500Load

purchased at RTP

90% of Max Off-Peak Load

purchased at off-peak fixed price

90% of Max Peak Load

purchased at peak fixed price

Excess load purchased at period fixed

prices but not used

Hedged Block Actual Usage

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 2223 24

0

500

1,000

1,500

2,000

2,500

0

500

1,000

1,500

2,000

2,500Load

purchased at RTP

90% of Max Off-Peak Load

purchased at off-peak fixed price

90% of Max Peak Load

purchased at peak fixed price

Excess load purchased at period fixed

prices but not used

Block and Swing Design

•Nominate kW (peak and off-peak) to fixed price block (TOP)

•Variance settled at the corresponding RTP swing price

1.01.0

RTP

1.2

TOU 3

1.75

Block Load

Pricing

+

Swing Load

Pricing

11

PRICE FXSS and DD Simulations

PRICE FXSS and DD Simulations

LMPs (DA & RT) by Day Type,

Price Scenario

Price Elasticitiesby Business Class

Customer Profiles and SICs

LSE EnergyMarket

Savings

LSE EnergyMarket

Savings

LSE HedgeSavings

LSE HedgeSavings

Net SocialWelfare

Improvement

Net SocialWelfare

Improvement

Participant BillSavings

Participant BillSavings

Status Quo Yr

Extreme Yr

High Yr

5 -Yr. Benefit Outlook

5 -Yr. Benefit Outlook

Market Outlook

Price FX Model

Rates

12

Maximum Non-Coincident Peak Load Reduction – New England

3-PartTOU

CPP VPP RTP B&S-70%

B&S-80%

B&S-90%

Status Quo YearHigh Year

Extreme Year0

100

200

300

400

500

600

700

MW

~ 600 MW

13

Average Coincident Monthly Peak Load Reduction – New England

3-PartTOU

CPP VPP RTP B&S-70%

B&S-80%

B&S-90%

Status Quo YearHigh Year

Extreme Year0

50

100

150

200

250

MW

~ 200 MW 2004 2005Top 5 20% 60%

Top 15 53% 53%

Summer

Coincidence of High Prices and High Load

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Benefits – Five Year Outlook – New England (33% of customers over 500 kW price responsive)

-$50

$0

$50

$100

$150

$200

$250

$300

Five-Year Benefit Expectations ($ Million)

Efficiency

Other Customers

Participants

15

Some Observations

Autonomous price response is the desired end result Don’t expect bloom naturally Flat default service engenders price inelasticity Dynamic default service fosters the development of

price response

Load bidding as a resource is poor second best solution

Because reliability is a social good, ISO ICAP, emergency and ancillary service programs

16

Summary

I welcome your comments and criticisms:

bneenan@utilipoint.com